Does governance quality moderate the impact of energy efficiency on CO2 emissions? A cross-country analysis

Abstract

Energy efficiency (EE) is widely recognized as a strategy to reduce greenhouse gas emissions. However, some empirical studies highlight the presence of rebound effects—where improvements in EE lead to increased overall energy consumption, ultimately resulting in higher CO₂ emissions. This study argues that such pollution-augmenting effects of EE are primarily observed in countries with poor governance quality. In contrast, economies with strong institutional frameworks—characterized by effective policy implementation and well-functioning markets—are better able to translate EE gains into actual reductions in emissions. To test all these hypothesized relationships, we use Environmental Kuznets Curve (EKC) framework and rely upon a large panel data of 112 economies over the period from 1996 to 2020. Our econometric results, based on dynamic OLS and system-GMM techniques, support the contingency effects of institutional quality in the EE–CO₂ emissions nexus. Furthermore, the empirical findings also support the relevance of the EKC theory for the selected panel economies. The study suggests that the global economy must improve the overall governance quality for reducing energy intensity and experiencing the desirable effects of EE for sustainable economic development.